Risk management a must with unstable cotton market

The cotton market has seen big movement over the past few weeks. And Jay Yates, Extension Program Specialist in risk management for the Texas A&M Agrilife Extension Service said that we saw what is called a moon-shot up where the price rallied to .94 cents. But that may be followed with equal or greater falls.

"Since then we've settled off into a sideways trading pattern which is known as a bear flag formation in technical terms," Yates said. "A lot of speculative and fund traders trade a lot on technicals and that is why it is important. That opens us up for the possibility of an equal continued drop of the same size as the drop that got us to the flag formation. So basically we went from .94 to .84 cents, and then .84 would take us to .74 cents."

Now besides the technical aspects of cotton trading, Yates said that the large international picture plays a big role in prices, too.

"The Indian rupee, the currency in India, has been on a fairly steep decline against the U.S. dollar. It has dropped nearly 20% since the first of the year which makes Indian cotton cheaper than U.S. cotton, and the Indian crop is progressing nicely," Yates said. "And then the third thing is change in Chinese policy. Now it is not going to change immediately, but they're planning to change away from the program where they buy up nearly a third of the cotton crop every year and put it in storage to maybe going to a deficiency style payment like what we did in the U.S. back in the late 80's and early 90's. And so how quickly they transition into that program and buy less cotton will also put some pressure on the market because right now the world supply of cotton is enough to put three pairs of jeans on every person on the planet, just out of the excess. China holds 62% of that world reserve."

Yates said that producers should continue to keep an eye on all three of those aspects affecting cotton futures. More than likely the biggest section of the market this will affect will be cotton available for sale on the free-market after the first of the year.